HAPL’s 6M19 core net profit of RM0.9m (-94.3% yoy) came in below our expectations, mainly attributable to lower-than-expected CPO prices and a higher effective tax rate. Given the weaker-thanexpected 6M19 results, we cut our 2019-21 core EPS by 8-39%. We believe CPO prices will likely recover in 2H19 on the back of declining global palm oil stocks, healthy demand from main buyers such as India and China, higher demand from the biodiesel industry and a slower global CPO production growth rate. Given the earnings forecast revisions, our DCF-derived TP has been lowered to RM1.70 (from RM1.77). We maintain our BUY rating on HAPL.

6M19 Core Net Profit at RM0.9m, Below Expectations

Hap Seng Plantation (HAPL) reported a lower 6M19 revenue of RM206.2m (-10% yoy), mainly attributable to lower CPO and PK average selling prices despite higher sales volumes of both products. The 6M19 EBITDA margin declined to 20.5%, down 7.1ppt yoy, due to lower CPO and PK prices as well as higher operating costs. After excluding one-off items, HAPL’s 6M19 core net profit dropped by 94.3% yoy to RM0.9m, below our expectation and mainly due to weaker-than-expected CPO prices and a higher effective tax rate. Despite weakness in the results, HAPL declared an interim DPS of 0.5 sen (6M18: 1.5 sen).

Weak 2Q19, Core Net Loss of RM6.2m

HAPL reported a 2Q19 revenue of RM80m, down 36.7% qoq, and LBT of RM4.6m (vs. a PBT of RM7.1m in 1Q19). This was mainly due to the lower ASPs and sales volumes for both CPO and PK, coupled with higher production costs. The CPO sales volume declined by 33.9% qoq to 34.6k MT, while the CPO ASP for the quarter was lower by 3.9% qoq to RM2,017/MT. After excluding one-off items, HAPL reported a core net loss of RM6.2m as compared to a core net profit of RM7.1m in 1Q19.

Maintain BUY But With a Lower TP of RM1.70

We have cut our 2019-21 core EPS by 8-39%, mainly to take into account lower CPO price and production assumptions for 2019-21E and a higher tax rate for 2019E. Given the earnings forecast revisions, our DCF-derived TP has been revised downward to RM1.70, from RM1.77 previously. We maintain our BUY rating, given a 15% upside potential.

Source: Affin Hwang Research - 29 Aug 2019